Despite global uncertainty and a strong currency, Canadian export growth will continue
By Alan M. Field
Although Europe managed to stave off a financial collapse in 2011, the outlook for Canada’s exporters weakened mid-year as a result of slower-than expected growth in the U.S., and supply-side disruptions from Asia stemming from last March’s Japanese earthquake and tsunami. For Canadian exporters, 2012 opens with a great deal of turmoil and uncertainty; not just as a result of uncertainties in the U.S. economy, which now purchases about 72 per cent of Canada’s exports, but also due to financial turmoil in the European Union, which buys only 8 per cent of Canada’s exports.
In a fall 2011 survey by Export Development Canada (EDC), nearly half of all Canadian exporters to the European Union said they have suffered significantly from the European financial crisis, and nearly 20 per cent expected a continued “strong impact” from the crisis on their long-term activity in that region. “This year’s multiple supply shocks hit the world at a particularly vulnerable moment,” said Peter Hall, EDC’s chief economist. Douglas Porter, deputy chief economist at BMO Financial Group, said, “I am more optimistic than the markets are, but that doesn’t make me an optimist. People are so downbeat that even if you see the glass as half full, you are viewed as an optimist. I find the negativity overdone, especially about the recovery in the U.S.”
According to the EDC survey, the Trade Confidence Index (TCI), or the overall confidence among Canadian exporters declined by 12 per cent compared with spring 2011. It was only the second time since 2000 that the TCI score dropped by more than 10 points. The first time was during the fall of 2000, shortly after the spectacular dot-com bubble burst. The latest TCI indicated declining confidence regarding expectations not only for export sales, but also for global economic conditions and international business opportunities during the upcoming six months. Fully 60 per cent of Canadian exporters said they believed that world economic conditions would worsen by the spring, compared with only 22 per cent who had expected results to deteriorate six months earlier. There was also a 12 per cent increase in the amount of Canadian exporters who believed that international business opportunities would worsen. “Canadian exporters appear frustrated by the uncertainty in the global economy and the world’s markets, a clear and consistent message we are hearing from our customers,” said Mr. Hall. “That uncertainty makes planning for the future extremely difficult. The absence of clear economic direction leads to a state of heightened tension where even the smallest nudge can trigger an irrational over-response. We believe that’s what this survey is telling us.”
Despite all that doom and gloom, Canadian exports have been remarkably strong when measured in dollar value. Buoyed by high commodity prices and stronger demand in the U.S., Canada’s worldwide exports rose in value terms by 12.6 per cent, year-on-year from October 2010 to October 2011, and by 12.8 per cent from January through October 2011. Canadian exports to the U.S. rose by 10.6 per cent from January through October 2011, and by 14.8 per cent in October 2011, compared to October of 2010. About half of Canadian exports to the U.S. consist of commodities, such as energy, lumber and metals, while the other half are manufactured goods. This makes the U.S. market a much more diversified target for Canadian exporters than China and Latin America, where Canada’s exports are mostly commodities.
The boom in energy exports
In 2011, the most spectacular increase in Canada’s exports came in the energy sector, reflecting rising prices on global markets. Canadian exports of energy products rose by 27.1 per cent in value during October 2011, compared to October 2010. In contrast, Canada’s automotive exports only rose by 5.6 per cent in October 2011, and by 1 per cent from January through October 2011. Even so, those figures reflect an ongoing improvement to U.S. consumer demand, which augurs well for Canadian exporters of autos and auto parts in 2012. “I am as encouraged by signs of improvement in the U.S. as I am discouraged by signs of bumbling around the EU,” said Mr. Porter. Mr. Hall said that recent economic data “defies the doom” that prevails about prospects among business leaders. “Consumer spending in the U.S. is on a sustainable rise and factory orders from across the G20 have been growing at double-digit pace since the start of the year. So what businesses are saying and what they are doing are at odds with each other.”
If the European Union implodes in 2012, notes Mr. Porter, the damage for Canada won’t be reflected so much in the “direct trade channel,” given the relative insignificance of European export markets for Canadian companies, as in the indirect channel of commodity prices. Prices of key Canadian commodity exports such as gold, silver, lumber, pulp and paper, and agribusiness products would plunge, inflicting serious damage on Canada’s aggregate export earnings. “All of those prices would go down to various degrees,” said Mr. Porter.
In 2012, as usual, Canadian export activity will continue to be focused largely on the U.S., but a growing number of Canadian companies will also expand their efforts to find markets in such newly emerging markets as Brazil, Russia, India, China and Mexico. The U.S. share of Canadian imports peaked at 85 per cent in 2001, at a time when the Canadian dollar was weak, the U.S. economy was strong, and commodity prices were relatively low, noted Mr. Porter. In mid-summer 2010, the U.S. share dropped to just 70 per cent before rising slightly to 72 per cent last October because of the economic recovery in the U.S.
Surviving the strong loonie
Having suffered mightily from the severe contraction of demand in the U.S. market a couple of years ago, many Canadian exporters are determined to take advantage of the faster GDP growth rates in emerging markets. A strong role model for such an approach can be found in British Columbia’s forest products sector, which has implemented programs aimed at teaching Chinese homebuilders how to build wooden houses. After training Chinese homebuilders in such techniques, B.C. builders went on to more than double the volume and value of softwood lumber exports to China last year. Last May, softwood lumber exports from B.C. to China exceeded by $3 billion the value of such shipments from B.C. to the entire United States. Unfortunately, it takes a long time to lay the foundations for this kind of diversification in exports, said Mr. Porter. “This is not like a switch that you can turn on,” said Mr. Porter. “It is a process that can take years.” He added that while many companies have been putting “a bit more emphasis on emerging markets” than in the past, many are challenged by the high value of the Canadian dollar, which reduces their competitiveness. A decade ago, in early 2002, the loonie reached its low point of about 60 U.S. cents, only to rise to about US$1.05 in summer 2011, and only dipped slightly to its current value of about 96.7 U.S. cents.
If, as anticipated, conditions in the U.S. economy improve during 2012, the Canadian dollar will further appreciate due to a stronger demand in the U.S. for Canadian exports. But if the U.S. economy flirts with a double-dip recession, the Canadian dollar will weaken slightly during 2012, providing Canadian exporters some relief from a loonie that averaged US$1.03 during 2011.
Despite exporters’ concerns about the global economy, Canadian exporters are better prepared to function with a strong Canadian dollar and “have been resilient in adapting to the strong dollar.” said Mr. Hall. He noted that Canada’s fiscal policy was well-managed going into the recession, and the banking sector has remained sound throughout the global economic downturn. Overall, EDC predicts that Canada’s exports growth will slow to 7 per cent in 2012, following its 12 per cent growth in 2011 – but leaving the country’s total exports well above the levels recorded before the economic crisis of 2008-9. When asked why Canadian exporters are still doing so much better despite the doom and gloom, Mr. Hall pointed out that it was not only due to higher commodity prices. He said that Canadian companies have accepted the fact that the stronger Canadian dollar “is here to stay, and they’ve incorporated it into their operational plans.”
What’s in store for 2012? While gradually improving global growth prospects will benefit almost all Canadian exporters, there will be significant variations among export industries, with some flourishing amid booming global demand while others struggle to be competitive in an environment of the strong Canadian dollar, according to the EDC.
Shipments of oil, gas and metals could be negatively affected by lower commodity prices in 2012, although volume shipments of those commodities are expected to continue to grow. Canada’s energy sector will benefit from higher prices and production of petroleum products and coal, with exports rising 20 per cent higher in 2011, but there is no further gain expected in 2012. Continued growth in the U.S. economy will mean that Canadian exports in the auto sector grow at a double-digit pace in 2012, according to EDC. Delayed orders have suppressed shipments in the aerospace sector this year, but EDC expects companies to make good on those commitments in 2012, and barring any unforeseen negative developments, exports should increase by 22 per cent.
Last year, export growth was strongest in Saskatchewan, thanks to the performance of fertilizer and agribusiness sectors, but it will moderate in 2012. Alberta, which has a greater dependence on the energy sector, will also see moderate growth in 2012, while Ontario will generate growth in the middle of the pack. Canada’s agricultural exports performed well in 2011 despite challenging weather conditions, since high prices more than compensated for disappointing yields. EDC Economics is forecasting a 15 per cent gain in 2011 and a further 6 per cent increase in 2012. Although hopes for a recovery in export volumes last year were frustrated by water-saturated soils in the Canadian Prairies, both 2012 and 2013 are expected to be very positive years for the Canadian agribusiness industry because of soaring demand in global markets.
As for important industrial sectors, exports of aircraft and parts posted no growth for 2011, but EDC forecasts surging exports of 22 per cent in that sector for 2012. Canada’s exports of metals will also be a key growth driver in 2012, rising 3 per cent over a substantial 16 per cent growth rate in 2011.
Although Canada’s automotive sector has been challenged by weak demand in the U.S., rising consumer confidence in that country – fueled by declining rates of unemployment and rising vehicle replacement rates – could boost auto sales in this highly integrated sector, where components are exported and re-exported across the Canada-U.S. border. According to J.D. Power, North American auto production will register about 12.9 million vehicles in 2011, up 9 per cent from 2010. Last October’s sales were up 7 per cent, year-on-year, registering a seasonally adjusted annualized rate of 13.1 million, up from 12.2 million a year earlier.
In the high-tech sector, EDC Economics projected a slight contraction in exports in 2011 because of lacklustre growth in Western Europe and steadily declining prices for many products. Although slower global growth weakened demand for Canadian high-tech exports throughout 2011, and the strong Canadian dollar impeded the industry’s cost competitiveness, prospects should improve during 2012. Stronger U.S. growth during 2012 “will offer an opportunity for a modest rebound as utilization, deployment and expenditure on advanced technologies pick up,” EDC forecasts in a recent report.
Robust demand for commodities from emerging markets and improved supply-side conditions contributed to higher growth rates in the latter half of 2011, and they are expected to continue to do so during 2012. British Columbia will begin to benefit from improving conditions in the U.S. housing sector and Ontario will benefit from increased output of manufactured metals.
A brief, province-by-province overview of prospects:
• Quebec: Export growth is expected to accelerate to 7 per cent in 2012, up from 4 per cent growth in 2011, according to EDC. In 2012, the aerospace sector will be the star performer for Quebec, offsetting reduced growth from industrial products as the price effect begins to wear off.
• Ontario: Ontario’s export sector, which registered gains of 9 per cent in 2011, is expected to grow by a further 10 per cent in 2012. Last year’s expectations were cut because of supply-chain disruptions in the auto sector and the impact of surprisingly slow economic growth in the U.S. In 2012, exporters of natural resources will continue to enjoy high commodity prices.
• Manitoba: Exports from Manitoba, which surged by 15 per cent in 2011, are expected to grow by a more modest 7 per cent in 2012. Agricultural exports have benefitted as record grain prices more than compensated for lower output. Manitoba’s energy sectors have also been benefiting from soaring global energy prices, due in part to the continued political instability in the Middle East and North Africa.
• Saskatchewan: EDC Economics projects a 5 per cent growth rate of exports from Saskatchewan, following a 22 per cent growth rate, the highest of any province in 2011. Exports of energy and fertilizers will benefit from rising prices, while agriculture should benefit in spite of lost ground after the extreme wet weather conditions.
• Alberta: Alberta’s exports surged by 18 per cent in 2011 and are expected to grow by an additional 2 per cent in 2012. Although Alberta is most famous for its energy sector, EDC Economics projects growth across the board in every major export category. High prices for crude oil have been a significant driver in boosting export dollar volumes.
• British Columbia: This province’s export sector will continue to expand at a 13 per cent pace in 2012, the highest rate of any province. This is mostly due to surging demand from Asia, which now purchases more than 40 per cent of British Columbia’s exports. Export growth to Asia’s emerging economies is expected to be more than 25 per cent in 2012. B.C.’s export prices have also been buoyed by historically high prices for many of its key commodities, including pulp, coal and copper. Most impressively, forestry exports are forecast to grow by 26 per cent in 2012.